Recent statements by the Group of Seven industrial nations and the International Monetary Fund underscore the growing pressure to reduce the massive US international deficit. Doing so will require both a higher national saving rate in the United States and a more competitive value for the dollar. Neither alone would be sufficient.

The US current account deficit reached an annual rate of $900bn at the end of last year, an amount equal to 7 per cent of gross domestic product. This enormous imbalance reflects the fact that US investment (including business plant and equipment and housing) exceeds US saving by 7 per cent of GDP. Cutting the US trade deficit to a sustainable level therefore requires a substantial increase in US national saving.